Market Insider

Currency Battles

November 17, 2016

One week after Donald Trump was voted in as the next President of the United States of America, the United States (U.S.) dollar hit a 14-year high. As the U.S. dollar strengthens, it is making it harder for traditional international buyers of U.S. grains to pay for it. This is why, if the American Greenback maintains its strength, you can expect that other grain options in South America, Europe, and even Australia and Canada become much more attractive! Further, the U.S. dollar could gain even more should the Federal Reserve increase interest rates in December, which looks like it will happen! More simply put, the strong battle that U.S. export grain sales have put up is very likely to lose the marketing-year war with currency as the downfall. Accordingly, it is possible that we could get a very ugly look from a price point of really how big this year’s record American crop is.

After hitting a four-year high last week, palm oil futures in Malaysia continue to pull back but canola has been able to dodge that decline on some weather and demand headlines. We know that combines were halted as rain and snow this week, but a recent Committee of Professional Agricultural Organizations (COPA) report states Canadian canola meal sales to China from January to August 2016 were the highest in five years at 415,000 MT (and that follows zero exports last year!) The reason for the big change year-over-year is the trade dispute we saw earlier in the year where canola seed exports were up in the air and so domestic crushing would have slowed, and as a result, importers just started buying up canola meal until the dispute was resolved in September. Of note though is that Canadian canola crush board profit margins are about $100 CAD/MT, or double what they were this time last year.

With harvest basically done in most of North America, the focus turns to the South American crop rather quickly where growing conditions continue to be generally favourable, although we are watching some wet issues in Argentina. While some hopefuls are waiting for a La Nina weather event to strike, most forecasters see it as being weak. Accordingly, in the past week since the U.S. election, the Brazilian Real has fallen 6 per cent against the U.S. dollar, which in turn can help increase the value of domestic prices. As a result, has created some good selling opportunities for Brazilian farmers who have not pre-sold much of the soybean crop that they have just planted or are planting right now. That being said, because the Brazilian soybean crop is going in faster than usual, combined with the recent currency depreciation, more buzz is building that said crop will start getting exported in January (again supporting our theory that international demand could switch to other origins sooner than later)!

From a cash perspective for Western Canada, front-month contracts grabbed some higher levels compared to last week’s volatile sell-down, whereas deferred delivery pulled back some. Hard red spring wheat prices saw basis widen with the lower Canadian dollar in addition to futures markets pulling back a bit. For durum wheat, cash prices continue to tick up but not as aggressively as in weeks past, suggesting that a suitable price equilibrium is being found by buyers and sellers. For cash canola, Southern Alberta remains the region with the best values with Eastern Manitoba not far behind. Basis was relatively flat this week as demand remains strong (canola crushers board margin is about $100 CAD/MT right now), but futures markets did get a bump, helping for a net gain of about a dime per bushel. Aggregately, other than durum, oats, and pulse crops, prices are still below where they were a month ago but depending where the USD-CAD relationship heads, we could, like Brazil and others, see some more improvements for domestic Canadian grain prices.